The conventional wisdom holds that the US can't have a strong economic recovery because it didn't have a deep recession. Simply put, there is no pent-up consumer demand to impel spending.
No less an authority than US Federal Reserve Chairman Alan Greenspan gave credence to that view when he presented the Fed's semi-annual monetary policy report to Congress last Wednesday.
"Through much of last year's slowdown ... spending by the household sector held up well and proved to be a major stabilizing force," Greenspan told the House Financial Services Committee. "As a consequence, although household spending should continue to trend up, the potential for significant acceleration in activity in this sector is likely to be more limited than in past cycles."
Most economists subscribe to the theory of a lack of pent-up demand, and there is something intuitively appealing about it.
After all, if something doesn't go down, how can it bounce back? In a Saturday New York Times story recapping the surprising 1.4 percent increase in fourth-quarter real gross domestic product (revised from a 0.2 percent gain) and 6 percent increase in consumer spending, Wells Capital Management senior economist James Paulsen was quoted as saying: "If nothing else, there soon won't be anyone left who needs anything."
Is demand finite? With 94.4 percent of the labor force working, is consumer demand for restaurant meals, travel, entertainment, doctors, lawyers and insurance limited? What about the need or desire to trade in the five-year old clunker for a shiny new SUV? Maybe it's time to upgrade the dishwasher, improve the sound quality of the stereo system, and install one of those 50-inch TV sets.
"Estimates of demand are not a fixed number," says Joe Carson, an economist at Alliance Capital Management. "They tend to move up and down with changes in the economy, labor markets and financial markets. Whatever level of demand exists at the end of recession, it goes up from there."
Greenspan, Paulsen and the rest of the herd are focusing on the super-charged pace of auto sales in the fourth quarter. Driven by zero-percent financing, sales of motor vehicles and parts zoomed an annualized 81.3 percent in the fourth quarter.
As far as the Great American Dream is concerned, Greenspan et al are arguing that because housing never weakened, it can't very well come back. New and existing home sales set a record in 2001 of 6.26 million units.
Housing, or residential investment as it's called in the GDP accounts, is a very small portion of the total pie: 4.3 or 4.4 percent of GDP, according to Michael Carliner, an economist at the National Association of Homebuilders. For that reason, even when housing's going gangbusters, its contribution to GDP growth tends to be quite small.
For example, going back to 1972 to capture the recoveries from four recessions, two of which (1973-1975 and 1981-1982) were long and deep, there are only 11 quarters out of 120 in which housing contributed more than 1 percentage point to GDP growth.
Four of those were in the aftermath of the 1981-1982 recession. Housing starts bottomed at 837,000 in November 1981, almost tripling to an all-time high of 2.26 million in February 1984. Yet the biggest quarterly contribution housing ever made to overall growth was 2.11 percentage points in the third quarter of 1983.
There are only three instances, in fact, in the past 30 years in which housing added upwards of 2 percentage points to real GDP growth. So residential construction, because of its small weight in the economy, isn't going to determine the recovery's fate.
The NAHB's Carliner is among those who say housing can't go much higher. Due to some fluky seasonal adjustment factors, total home sales hit a record 6.8 million annualized pace in January.
"We don't have any people who chose not to buy or were unable to buy the product," Carliner says.
On the supply side, there is no evidence that the late 1990s boom featured a speculative building binge like the one in the 1980s.
"There is no inventory overhang," Carliner says. "And there are a fair amount of unfilled orders, defined as a sales contract for a house that the builder hasn't conveyed yet."
As far as auto sales are concerned, the worst fears that October's 21.3 million annualized incentive-driven sales pace would lead to plummeting first-quarter sales aren't being realized. February's seasonally adjusted selling rate for cars and light trucks was 16.7 million, not far short of last year's 17.2 million pace, the second-best year on record.
Rather than robbing from this year's sales, all last year's sales seem to have done was steal from auto manufacturers' profits! While there is some evidence that deep recessions are followed by strong recoveries and shallow slumps by weak initial rebounds, "any relationship between the severity of the slowdown in consumer spending and the strength of the subsequent rebound is hard to establish," says Peter Kretzmer, senior US economist at Bank of America Securities.
Consumer spending generally declines during recession. Of the four post-World War II recessions where it never fell on a year-over-year basis, "two were followed by robust rebounds in consumer spending," Kretzmer says. "It's not at all clear that the stronger-than-average consumer spending during this recession points to weaker-than-average spending in the ensuing recovery." The resilience of consumer spending and the US economy has come as a surprise to most folks. They don't seem to understand that what the Fed prints (money) someone will spend.
If the magnitude of the decline were the sole determinant of the strength of the rebound, why isn't the pent-up demand crowd hawking a renaissance in capital spending following the collapse?
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